As he enters office later this month, Donald Trump will be thrown slap bang into the contradictions of his policy platform. The calls he makes will be vital for the international economy – and Ireland. The central issue is clear. The US economy is on a reasonable track and the stock market is rising. Investors are betting that the new president will choose to ride this wave, rather than go ahead with the full-on threats on tariffs and migration policy that could hit confidence, push up inflation and send share prices downwards. If their confidence is misplaced, there is trouble ahead.
The central contradiction of Trump’s policies is that the recipe to boost American growth and living standards will do the exact opposite. Consumers would pay for this crazy policy to “Make America Great Again”. But among the main characters in Trump’s supporting cast, there are a number who argue that any short-term hit to the economy from implementing the policies promised during the election campaign is well worth taking for longer-term economic, social – and presumably political – gain. Trumpism wasn’t just a spin to get elected – there are true believers who want it to happen and already there are signs of tensions in the camp about what policies to implement and when to do so.
So far, investors are choosing to set the risk that this camp will prevail to one side, though they did have a brief wobble just before Christmas, fearing the impact of Trump policies on inflation and interest rates. However they are generally ignoring – or at least downplaying – Trump’s recent statement that on his first day in office on January 20th he will impose tariffs on imports from China, Canada and Mexico and his wider threats of tariffs on countries that threaten the international dominance of the US dollar. The more benign take, at least concerning Canada and Mexico, is that this is a negotiating tactic looking for policy changes on migration and drug control. We will see soon enough.
Trump supports tariffs as a way of rebalancing America’s trade relationships — though investors interpret some comments as suggesting he sees them more as a negotiating threat
Meanwhile, financial markets have been reassured by the nomination of Scott Bessent, a hedge fund manager and billionaire, as US treasury secretary, believing he will appreciate the concerns of the financial markets and act as a counterbalance to some of the true believers. Bessent’s comments in recent months, however, show he, too, has bought into the Trump agenda, at least in part. He supports tariffs as a way of rebalancing America’s trade relationships – though investors interpret some comments as suggesting he sees them more as a negotiating threat. He argues that they will not inevitably push up prices for consumers. Common sense – and the 16 US Nobel laureates who criticised Trump’s proposals as inflationary earlier this year – would suggest otherwise.
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The other leg of Trump’s agenda, a crackdown on immigration, also threatens to increase inflation by leaving many enterprises in areas like retail, farming and housebuilding short of staff, as well as causing huge social upheaval. Higher inflation would eat into people’s real incomes and keep interest rates higher for longer.
The opinion on financial markets is interesting, as it reflects the views of a lot of clever people. But that doesn’t mean they are correct. Indeed, some did choose to cash in some of their chips in the last few trading sessions of 2024, taking profits after big gains. Central to Trump’s election and his extreme agenda on migration and tariffs were that they would help working Americans, the middle class who feel left behind in recent years when the billionaires have cashed in. Trump has mined that dissatisfaction, promising that there was another way.
Does Trump push ahead and do as he promised on tariffs, tax and migration, creating chaos and uncertainty and hitting growth and living standards?
He has pledged to pull back on globalisation – on other countries “taking advantage” of the US through aggressive policy action. Does he abandon this in favour of keeping his pals on Wall Street happy with a rising stock market? Or does he push ahead and do as he promised on tariffs, tax and migration, creating chaos and uncertainty and hitting growth and living standards?
Perhaps he will try to ride both horses, imposing some tariffs – notably on China and in some selected industries such as cars – while holding off on his promised blanket attack on all imports. He could similarly make a lot of noise on migration, tightening rules and throwing out people with criminal records, but not pursue the large repatriation programme promised during the campaign. The bluster would be designed to appeal to the wider electorate; the reality would keep the Dow Jones average heading higher. Or so the theory goes. Trump could find the money to renew his tax cuts introduced in 2017 which run out this year and might even cut the US corporate tax rate a bit further. Deregulation would help some key industries.
This scenario is what is keeping investors optimistic and the US market on the up. It is what has led big investment houses like Goldman Sachs and UBS to forecast that 2025 will be a decent year for the US economy and the markets. But they warn that across-the-board tariffs in a more extreme version of Trumponomics 2.0 could hit growth prospects and lead to a market reversal. It is a narrow path for Trump to walk, made all the harder by America’s massive national debt pile, which could yet emerge as a vital constraint on policy action for the administration.
If he wants to push ahead and lay down an early marker of his desire to remake the international economic order, tariffs are the one key area of economic policy where Trump has some latitude to act without congressional approval, though there is intense legal debate in the US on how far a solo run could go. So action on tariffs is the first key pointer to watch for.
We have to hope that the relative optimism of the financial markets is correct. If not, 2025 will – sooner or later – be marked by a juddering fall in US share prices
For Ireland, what Trump will do is, of course, far from an academic debate. As a State that thrives from its central position in the global flow of trade and money – and America’s part in it – Trump’s economic isolationism is a big threat. More specifically, US tariffs and corporate tax changes could hit growth, investment and corporate and income tax revenues here.
We have to hope that the relative optimism of the financial markets is correct. If not, 2025 will – sooner or later – be marked by a juddering fall in US share prices, reverberating internationally, and a need to revise the outlook for the Irish economy and the amount of money that the next government will have to spend over its term in office. Any hit to revenues may be gradual rather than sudden, but this is still a substantial issue for this State.